Welcome back. In this lesson, we're going to talk about some of the significant changes to business taxation contained in the tax cuts and Jobs Act. As you will recall from our first lesson, most of the tax changes related to the taxation of businesses are permanent. Meaning that while a future congress and president may decide to repeal or modify a law. These provisions are not scheduled to expire or sunset like most of their individual counterparts, and generally, all of these provisions unless otherwise noted, will be effective starting with the 2018 tax year. First, and potentially the most well-known change, congress eliminated the progressive tax rate schedule applicable for C corporations which had a top corporate income tax rate of 35 percent, and in its place, they instituted a new 21 percent flat corporate income tax. A flat tax as you may recall, applies the same tax rate regardless of your tax base. Which in this case, is the taxable income of a C corporation. In addition, the corporate alternative minimum tax or AMT has been repealed. Although, the individual AMT remains. Likewise, the domestic production activities deduction, also known as the Section 199 deduction, which provided an extra deduction based on income and wages, to certain domestic manufacturers, producers, farmers, mining operations, has also been repealed. For net operating losses, there's been a change. But we still need to know the old rules for NOLs that arose and tax year 2017 or earlier. But for the future, for any loss arising in 2018 and later, we have some different rules to think about. First, the carryback period has in general been eliminated. Instead, NOLs will just carry forward and they will carry forward indefinitely, and there is also a new 80 percent of taxable income limitation on the usage of those NOLs carryforwards. So a 2018 or later, NOL, can only offset 80 percent of the taxable income of the year to which it was carried forward. Now, we had said that the business provisions are generally permanent. But the expansion of bonus depreciation is the notable exception. As you may recall, bonus depreciation provides an extra depreciation deduction in the year a property is placed in service, and this is a deduction over and above it's standard makers depreciation deduction. So for property placed in service from September 27th, 2017 through December 31st, 2022, there is now a 100 percent bonus depreciation deduction available. For years after 2022, the bonus depreciation deduction percentage gradually decreases until it sunsets entirely at the end of 2026. Making this deduction even more lucrative to taxpayers is that, the property must no longer be new in order to be eligible for a bonus depreciation. So, if you purchase qualifying property, you can write off the entire purchase price in year one instead of having to depreciate it over multiple years. For the section 179 deduction, another provision aimed at accelerating depreciation deductions, congress increased both the eligible section 179 election and the threshold of acquisitions at which the electable amount begins to phase out. However, unlike bonus depreciation this expansion is permanent. Next, we have a change to like-kind exchanges, which were a special type of non-recognition transaction where you could generally trade property without having to recognize gain, absent boot. You also would not have to recognize loss, as long as this property that you exchange was considered to be of a like kind, but starting in 2018, these like kind exchanges are now limited to only real property such as land or buildings. So, no more tax-free exchanges of personal property such as vehicles, machinery, and other equipment. Those would now be taxable transactions. Next, we have the elimination of a deduction for entertainment expenses. Previously if you took your client out to a concert and discuss business. Those tickets would have been 50 percent deductible, but starting in 2018, those tickets are now non-deductible. Here congress certainly took some of the fun out of the tax code, but don't worry. There's still an exception for employees social events. So, no need to cancel the monthly office happy hour, and in contrast to the new limitation on entertainment, meals generally remain 50 percent deductible. The Tax Cuts and Jobs Act also made modifications to the limits on deductibility for excessive wages paid to certain employees of publicly traded companies. The big change here is that, incentive-based compensation is no longer exempt from this wage deductability limitation. It used to be that you could pay your CEO or other top executive. A million dollars in wages and then supplement that pay with incentive-based compensation. All of which would have been deductible. But now, incentive-based compensation is included in that $1 million deduction cap. Another new limitation on deductions is one on business and trust expense. In general, businesses with over $25 million and average annual gross receipts, can now only deduct interest up to 30 percent of their adjusted taxable income. What exactly is adjusted taxable income.? Well, it depends on the year. Adjusted taxable income for 2018 through 2021, is earnings before interest, taxes, depreciation, and amortization. After 2021, is just earnings before interest and taxes. Congress has also loosen the restrictions on what entities may use the cash method of accounting. Previously, C corps and partnerships with C-Corporation partners could only use the cash method of accounting, if they had less than $5 million and average annual gross receipts. Now that testing threshold is up to 25 million. In addition, the requirements for maintaining inventory under the accrual method of accounting have also been loosened. For partnerships, technical terminations have been eliminated. Previously, a failure to conduct business in a 12-month period or a sale or exchange of a 50 percent or greater partner, ship interests created a termination or the partnership. In many cases, this deem termination or paper termination, created quite an accounting mess. But, now the technical termination rule has been eliminated. Any partnership will only terminate when it actually ceases operations, and finally, an area where the Tax Cuts and Jobs Act made one of its most drastic changes was related to the international taxation of a corporation. Previously, the United States had used a worldwide system of taxation for corporations, just like for individuals. This meant that a corporation was subject to taxation in the United States, no matter where in the world their income was earned. You could get a credit for taxes paid to another country, but you had to pay at least the applicable US tax rate. There were ways to avoid worldwide taxation. For example, you could permanently reinvest your earnings in a foreign country. After the Tax Cuts and Jobs Act, International taxation for corporations has moved to a quasi-territorial system of taxation, and a territorial system, only income attributable to the taxing country is subject to tax in that country, but a pure territorial system also creates incentives for companies to structure their dealings in a way that avoids taxation. So what we have now is a quasi-territorial system where income attributable to the United States is taxed in the United States, plus limited other categories of foreign income to prevent erosion of the US taxpayers.
